Internal reference price formation in support of UK and US grocery retail price decision-making

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Abstract

UK and US grocery retailers operate with narrow profit margins; the shelf price of each product sold has a direct affect on these profits. Despite the importance of pricing, grocers adopt sub-optimal risk mitigation tactics rather than profit maximization. Part of a grocer’s perceived pricing risk is their lack of any understanding of customer product price expectation. The academic concept of Internal Reference Price (IRP) represents that price expectation but, despite a large body of research, IRP does not appear to be used in UK or US grocery pricing. This is due in part to academics’ lack of understanding of pricing practitioners’ actual needs and the context they work within, and has led to commercially inappropriate IRP model formulations.
This exploratory study corrects this lack of understanding and provides both an integrated theory of pricing behaviour and its context, along with an applied IRP model that has the potential to improve UK and US grocer price decision-making.
The models were developed using Classical Grounded Theory based on information from in-depth semi-structured interviews held with 20 UK and US grocery pricing practitioners.
The research represents a significant contribution to both the academic and commercial body of knowledge. It does so, firstly, through the provision of an explanatory and predictive grounded theory of grocery pricing behaviour, and secondly through the development of an applied conceptual grounded model of IRP, both of which have been unseen to date.